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Using Xero Inventory for the Management of Raw Materials

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Inventory is a feature of Xero at no additional cost, and can be suitable for smaller businesses who need stock control but cannot justify the expense and complexity of a 3rd party stock control system. While Xero does not directly offer raw materials inventory management, it is possible to use it for this purpose with the following workaround.

How to get raw materials into your Xero inventory

This is our recommended workaround for businesses who are manufacturing products, and the products are made up of multiple raw materials or components. For this solution, all raw materials as well as the final products for sale are entered as tracked inventory.

Bring Raw Materials in the Inventory

Bring Raw Materials into stock using a Bill:

DR: Stock (increase the stock level of the raw material at cost price)
CR: Creditors


Use Raw Materials to create the Product for Sale

Note: The Cost Price of the Raw Materials must match the Cost Price of the Product for Sale. 

For example:
Raw Material 1 Cost price: $40
Raw Material 2 Cost Price: $20
Product for Sale 1 is made up of Raw Material 1 and Raw Material 2 so will have a Cost Price of $60


Use a Bill to bring the Product for Sale into Stock (positive Stock value in Xero)

DR: Stock (increase stock level of Product for Sale at cost price)
CR: Creditor – Recommend to have a “Production in House” contact

(this Creditor will clear in the next step and should ALWAYS be nil)


Create a Credit Note to take the Raw Material out of Stock directly from the Bill

This has the advantage of linking the transactions directly together from the Bill and it’s Credit Note. Also, the Bill and the Cost Price of the Product for Sale will default to the Unit Price rather than the Sales Price. (From the Bill, use the [Bill Options][Add Credit Note] drop down, found top right hand side of the window)

Change the items on the Credit Note to the Raw Materials you are using to create the Product for Sale. The total cost price of the Raw materials must match the cost price of the Product for Sale Item.

CR: Stock (decrease stock level of Raw Materials at cost price)
DR: Creditor – “Production in House” (will bring the Creditor balance back to nil)

The Overall impact is that the Stock Value does not change, it just moves from the Raw Materials to the Product for Sale. The Cost of Good Sold will be calculated as usual from the Sales invoice when the Sales Items are sold.

Making Xero Inventory work for you

Xero Inventory can be made to work for most small businesses, including manufacturing companies, even if certain features often requested are not available:

  • the ability to handle back orders
  • multiple pricing tiers
  • managing timing differences between stock levels and the dates of bills and invoices
  • managing production with use of multiple raw materials

For these and other requirements, Living Business will find creative ways to help you and can configure the inventory management solution best suited to your company’s needs. Get in touch with us to find out more.